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June 28 — The state of Texas may challenge in court the Equal Employment Opportunity Commission's
enforcement guidance on employers' use of criminal background checks, a divided U.S.
Court of Appeals for the Fifth Circuit ruled
(
Texas v. EEOC, 5th Cir., No. 14-10949, 6/27/16
).

In a 2-1 decision, the appeals panel said a federal district court erred by dismissing
the state's lawsuit for lack of subject-matter jurisdiction. Instead, the Fifth Circuit
said Texas as a state employer has standing because it is covered by the EEOC's 2012
guidance and must alter its hiring policies or incur significant costs if the guidance
were enforced against the state.

The guidance also is a “final agency action” subject to judicial review under the
Administrative Procedure Act, the court said.

The decision clears the way for a potential district court ruling on whether the EEOC's
guidance exceeds the agency's authority under Title VII of the 1964 Civil Rights Act.

Depending on how broadly the lower court frames the issue, it could resolve that question
for Texas alone or more generally for all public and private employers, said Gerald
Maatman, a management lawyer with Seyfarth Shaw in Chicago.

The EEOC has drawn “pretty widespread criticism” regarding its criminal check guidance
for acting more like a legislature than an enforcement agency, Maatman told Bloomberg
BNA June 28. Employers “should applaud”
the Fifth Circuit's ruling and will be watching “very closely”
to see what the district court does, he said.

In dissent, Judge Patrick E. Higginbotham said Texas's lawsuit was properly dismissed
because the state can't meet constitutional standing requirements.

The Texas attorney general's office June 28 said it is “pleased” with the ruling and
looks forward “to demonstrating that the EEOC’s hiring guidelines are unlawful.”

The EEOC June 28 declined to comment “at this stage of the litigation.”

State Bars Felons for Some Jobs

Texas's appeal presented “only a jurisdictional issue,” but its lawsuit “ultimately
seeks to question whether a bar on hiring felons constitutes an unlawful employment
practice under Title VII,”
Judge E. Grady Jolly wrote in an opinion joined by Judge W. Eugene Davis.

Many Texas state agencies don't hire convicted felons or those convicted of certain
categories of crimes, the court said. The state says it applies the hiring bars neutrally
to all applicants, without regard to race, the court said. But Texas also said it
applies the exclusions categorically and doesn't undertake an “individualized assessment”
into the nature of a prospective employee's conviction, the court said.

In contrast, the EEOC guidance said “blanket exclusions” of job applicants with past
criminal convictions could cause disparate impacts on black and Hispanic applicants.
The EEOC said an employer could show its criminal background check policy was “job-related”
and “consistent with business necessity” if it includes an “individualized assessment”
of the particular job and conviction and gave applicants an opportunity to explain
the circumstances of their criminal histories.

The EEOC can't promulgate binding substantive interpretations of Title VII and it
can't file enforcement actions against state employers directly, the court said. But
the EEOC can investigate state employers for potential Title VII violations and refer
cases to the Justice Department for potential litigation.

The district court dismissed Texas's lawsuit because the EEOC lacks authority to sue
state employers and because it said Texas wasn't subject to any imminent agency enforcement
action.

Standing to Sue

But Texas can sue because it is an “object” of the EEOC guidance and it is currently
“suffering an injury” sufficient to confer standing, the Fifth Circuit said.

“Regardless of whether the guidance actually preempts Texas's laws, the guidance does,
at the very least, force Texas to undergo an analysis, agency by agency, regarding
whether the certainty of EEOC investigations stemming from the enforcement guidance's
standards overrides the state's interest in not hiring felons for certain jobs,” the
court said.

Such “injuries”
confer standing, “especially when considering Texas's unique position as a sovereign
state defending its existing practices and threatened authority,” the court said.

The Fifth Circuit previously has held that “being pressured to change state law” constitutes
an injury for purposes of a state's constitutional standing to sue, Jolly wrote.

“Texas has standing because it is an object of the guidance and, taking the complaint's
allegations as true, has alleged a sufficient injury in fact, that is that the guidance
forces Texas to alter its hiring policies or incur significant costs,” the court said.

Final Agency Action

An administrative action is “final agency action” under the Administrative Procedure
Act if it is the “consummation of the agency's decisionmaking process” and “one by
which rights or obligations have been determined, or from which legal consequences
will flow.”

The parties didn't contest the first requirement, so the issue was whether the EEOC
guidance is an agency action “by which rights or obligations have been determined”
or “from which legal consequences will flow.”

“The guidance imposes ‘legal consequences' in the sense that the EEOC has committed
itself to applying the guidance when conducting enforcement and referral actions,”
the court said. “In particular, the guidance suggests that its provisions are to be
taken as conclusive, and offers only two escapes from an adverse EEOC determination.”

The EEOC argued the guidance isn't final because it can't directly bring an enforcement
action against state employers.

“But the guidance is not simply limited to one or only a few investigations conducted
by the EEOC against Texas or some other state,” the court said. “Instead, it is a
blanket policy that the EEOC has committed itself to applying with respect to virtually
all public and private employers.”

The EEOC argued its guidance isn't final agency action because it has the force of
law only to the extent a court in an enforcement action agrees with it.

But the EEOC “evades the obvious differences” between an agency compliance manual
provision and its enforcement guidance, the court said. The guidance “purports to
bind the agency itself” and provides “an exhaustive procedural framework” for EEOC
officials to follow, the court said.

“By binding itself to the guidance's standards and directives, the EEOC has assured
employers nationwide, public and private, that, so long as they conform their conduct
to the guidance's ‘safe harbor' requirements, they will not be deemed in violation
of Title VII by EEOC investigators,”
the court said. “Thus, they will avoid referral to the U.S. attorney general for prosecution.
This, in turn, guarantees employers that they will not face an ultimate finding of
monetary or injunctive liability as a result of a government enforcement action.”

Dissent: ‘Nakedly Political Suit.'

Texas can't prove standing mainly because the EEOC lacks power to sue the state, Higginbotham
wrote in dissent.

“While the guidance is a cloud on the political horizon, it inflicts no injury upon
Texas,”
the dissent said.

The EEOC could refer a case against Texas to the Justice Department, but the attorney
general isn't obliged to adhere to the EEOC guidance, the dissent said. If the Justice
Department or a private citizen did sue Texas, a court also would have no obligation
to follow the guidance, Higginbotham wrote.

“The EEOC does not have the authority to issue a binding interpretation of Title VII,”
the dissent said. “As a result, Texas's reliance on cases involving preemption is
misplaced. The guidance is not a substantive regulation—it can neither dictate the
outcome of a Title VII action nor preempt state law.”

A finding of no jurisdiction respects the judicial branch's constitutional limits,
the dissent said. The court shouldn't allow “such a nakedly political suit”
to proceed, Higginbotham wrote.

The district court abided by its duty not to intervene absent a live “case or controversy,”
the dissent said.

“There the matter ought to lie until a case or controversy triggers our duty to resolve
Texas's not insubstantial challenge to the EEOC's view of the law,”
Higginbotham wrote. “Until then, the political arena is the appropriate field of contest.”

The Texas state attorney general and solicitor represented the state. Justice Department
attorneys in Washington represented the EEOC.

To contact the reporter on this story: Kevin McGowan in Washington at
kmcgowan@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at
smcgolrick@bna.com

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